Annur, Coimbatore – 641 653 v. The Deputy Commissioner Of Income Tax,Corporate Circle –

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 10.06.2019 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case No.118 of 2018 M/s.India Trimmings Pvt. Ltd.,66/636, Pillaiappan Palayam,Telughupalayam Post, Annur, Coimbatore – 641 653. ...Appellant/Respondent -Vs- The Deputy Commissioner of Income Tax,Corporate Circle – 1,63-A, Race Course Road, Coimbatore. ...Respondent/Appellant Prayer: - Tax Case Appeal under Section 260-A of theIncome Tax Act, 1961, is directed against the order passed bythe Income Tax Appellate Tribunal “D” Bench, Chennai in I.T.ANo.476/Mds/2016 dated 31.01.2017 for the assessment year 2011-12preferred against the Order of the ACIT, Secretary, DisputeResolution Parcel -2, Bangalore passed in F.No.41/DRP-2/BNG/2015-16, dated : 24.11.2015, against the order passed bythe Deputy Commissioner of Income Tax, Corporate Circle- 1,Coimbatore, passed in PAN AAACI 6394N, dated : 25.02.2015. For Respondent : Mr.T.R.Senthil Kumar, assisted by Mrs.K.G.Usha Rani This Tax Case Appeal by the Revenue filed under Section260-A of the Income Tax Act, 1961, ('the Act' for brevity) isdirected against the order passed by the Income Tax AppellateTribunal “D” Bench, Chennai in I.T.A No.476/Mds/2016 dated31.01.2017 for the assessment year 2011-12. https://hcservices.ecourts.gov.in/hcservices/ following substantial questions of law:- "(i) Whether the Appellate Tribunal iscorrect in law in setting aside the order of theDispute Resolution Panel on the misconstruction ofthe provisions of sub-sections (5), (7) and (8) ofSection 144C of the Act even though the issuesbefore the DRP were decided by them based on thematerials furnished for reaching their conclusionsin para 3.2.1 and para 3.3.4 of the order dated24.11.2015? (ii) Whether the Appellate Tribunal iscorrect in law in exceeding the grounds canvassedby the Revenue at the time of filing the appeal,at the time of the hearing as well as based on thereport furnished by the TPO in the hearingconducted by them whereby the excessive use ofjurisdiction by the DRP was not canvassed in sofar as the decisions rendered in para 3.2.1 andpara 3.3.4 of the order dated 24.11.2015?(iii) Whether the Appellate Tribunal iscorrect in law in setting aside the order of theDRP dated 24.11.2015 in misreading para 3.2.1 andpara 3.3.4 on the interpretation of the provisionsin sub-sections (5), (7) and (8) of Section 144Cof the Act proving perversity in recordingfindings at paras 7 & 8 of the impugned order bothon facts and in law?” 3.We have heard Mr.A.S.Sriraman, learned counsel for theappellant/assessee and Mr.T.R.Senthil Kumar, learned SeniorStanding Counsel assisted by Mrs.K.G.Usha Rani for therespondent/Revenue. 4. Two issues arise for consideration in this appeal.Firstly, whether the Tribunal in the impugned order could haveheld that the Dispute Resolution Panel (DRP) has no authorityeither to direct the Assessing Officer or Transfer PricingOfficer (TPO) to make further enquiry and decide the matter. Thesecond issue is whether the Tribunal was right in not decidingthe grounds raised by the Revenue in their grounds of appealtouching upon the merits of the assessment order dated28.12.2015 which has given effect to the order passed by the DRPdated 24.11.2015. 5. On the first issue, the Tribunal took intoconsideration sub section 8 of Section 144C and held that DRPhas no authority to direct the Assessing Officer or the TPO tomake further enquiry and decide the matter and at best can callfor remand report from any Income Tax Authority and decide theissue itself by adjudicating the matter. To resolve the https://hcservices.ecourts.gov.in/hcservices/ controversy raised, it may be necessary for us to take note ofSection 144C of the Act and the relevant sub sections which arequoted herein below: 5. On the first issue, the Tribunal took intoconsideration sub section 8 of Section 144C and held that DRPhas no authority to direct the Assessing Officer or the TPO tomake further enquiry and decide the matter and at best can callfor remand report from any Income Tax Authority and decide theissue itself by adjudicating the matter. To resolve the https://hcservices.ecourts.gov.in/hcservices/ controversy raised, it may be necessary for us to take note ofSection 144C of the Act and the relevant sub sections which arequoted herein below: “144C(1)TheAssessingOfficershall,notwithstanding anything to the contrary containedin this Act, in the first instance, forward a draftof the proposed order of assessment (hereafter inthis section referred to as the draft order) to theeligible assessee if he proposes to make, on orafter the 1[st] day of October, 2009, any variation inthe income or loss returned which is prejudicial tothe interest of such assessee.(2)......(3).....(4)..... (5) The Dispute Resolution Panel shall, in a casewhere any objection is received under sub-section(2), issue such directions, as it thinks fit, forthe guidance of the Assessing Officer to enable himto complete the assessment.(6)..... (7) The DRP may, before issuing any directionsreferred to in sub-section (5), - (a) make such further enquiry, as it thinks fit; or (b) cause anyfurther enquiry to be made by any income-taxauthority and report the result of the same to it.(8)The DRP may confirm, reduce or enhance thevariations proposed in the draft order so, however,that it shall not set aside any proposed variationor issue any direction under sub section (5) forfurther enquiry and passing of the assessment order.(9).....(10) Every direction issued by the DRP shall bebinding on the Assessing Officer. (11)....(12)....(13) Upon receipt of the directions issued under subsection (5), the Assessing Officer shall, inconformitywiththedirections,complete,notwithstanding anything to the contrary containedin section 153, the assessment without providing anyfurther opportunity of being heard to the assessee,within one month from the end of the month in whichsuch direction is received. (14).....(15).....” 6. In the instant case, the draft assessment order waspassed by the Assessing Officer under Section 144C(1) r/wSection 143(3) of the Act on 25.02.2015. On receipt of the draft https://hcservices.ecourts.gov.in/hcservices/ order, the appellant/ assessee submitted their objections interms of sub section 2 of Section 144(C), in terms of subsection 5 of Section 144C. The DRP shall, in a case where anyobjection is received under sub section 2, issue suchdirections, as it thinks fit, for the guidance of the AssessingOfficer to enable them to complete the assessment. 7. In terms of sub section 7, the DRP may, before issuingany directions referred to in sub-section 5 make such furtherenquiry, as it thinks fit; or cause any further enquiry to bemade by any income tax authority and report the result of thesame to it. 8. Sub Section 8 of Section 144C empowers the DRP toconfirm, reduce or enhance the variations proposed in the draftassessment order, however, it shall not set aside any proposedvariation or issue any direction under sub-section (5) forfurther enquiry and passing of the assessment order. 9. In terms of sub section (10) of Section 144C, everydirection issued by the DRP shall be binding on the AssessingOfficer. 10. In terms of sub section 13 of Section 144C, uponreceipt of directions under sub-section (5), the AssessingOfficer shall, in conformity with the directions, complete,notwithstanding anything to the contrary contained in Section153, the assessment without providing any further opportunitybeing heard to the assessee, within one month from the end ofthe month in which such direction is received. 9. In terms of sub section (10) of Section 144C, everydirection issued by the DRP shall be binding on the AssessingOfficer. 10. In terms of sub section 13 of Section 144C, uponreceipt of directions under sub-section (5), the AssessingOfficer shall, in conformity with the directions, complete,notwithstanding anything to the contrary contained in Section153, the assessment without providing any further opportunitybeing heard to the assessee, within one month from the end ofthe month in which such direction is received. 11. The Tribunal has faulted the DRP by holding that ithas exceeded its jurisdiction as circumscribed under Section144C. To be noted, that the appeal filed by the Revenue beforethe Tribunal was not against the order of DRP but challenged theassessment order dated 28.12.2015 under Section 144C(13) r/wSection 143(3) of the Act. 12. We have perused the grounds of appeal raised by theRevenue which are extracted herein“2.The Hon'ble DRP erred in allowing the claim ofthe assessee for inclusion of M/s.Ashnoor TextilesMills Ltd., as a comparable and adjustment onaccount of personnel cost and also holding thatthere was no basis for the TPO to reject M/s.AshnoorTextiles Mills Ltd., holding it as loss making.3. The Hon'ble DRP erred in holding that theassessee has furnished the details of break-up ofemployee cost for itself as well as for comparablesand directing that appropriate adjustment should beallowed to the assessee.Revenue which are extracted herein“2.The Hon'ble DRP erred in allowing the claim ofthe assessee for inclusion of M/s.Ashnoor TextilesMills Ltd., as a comparable and adjustment onaccount of personnel cost and also holding thatthere was no basis for the TPO to reject M/s.AshnoorTextiles Mills Ltd., holding it as loss making.3. The Hon'ble DRP erred in holding that theassessee has furnished the details of break-up ofemployee cost for itself as well as for comparablesand directing that appropriate adjustment should beallowed to the assessee. 4. The Hon'ble DRP failed to note that the assesseewhile calculating the PLI of M/s.Ashnoor TextilesMills Ltd., has not included other operationalexpenditure of the industry amounting to Rs.4.17crores thereby ending with a positive operatingprofit, whereas the TPO has included thisoperational expenditure and arrived at a negativeOP/OC at (-) 5.13%” 13. On a perusal of the above grounds, it is seen that theRevenue was aggrieved by the assessment order dated 28.12.2015.On merits we find that the Revenue has not questioned thejurisdiction of the DRP which order had worked itself out andculminated in an assessment order dated 28.12.2015. Thus, theTribunal should have considered the correctness of the finalassessment order dated 28.12.2015. 4. The Hon'ble DRP failed to note that the assesseewhile calculating the PLI of M/s.Ashnoor TextilesMills Ltd., has not included other operationalexpenditure of the industry amounting to Rs.4.17crores thereby ending with a positive operatingprofit, whereas the TPO has included thisoperational expenditure and arrived at a negativeOP/OC at (-) 5.13%” 13. On a perusal of the above grounds, it is seen that theRevenue was aggrieved by the assessment order dated 28.12.2015.On merits we find that the Revenue has not questioned thejurisdiction of the DRP which order had worked itself out andculminated in an assessment order dated 28.12.2015. Thus, theTribunal should have considered the correctness of the finalassessment order dated 28.12.2015. 14. Next we examine as to whether the DRP has exceeded itsjurisdiction than what has been circumscribed under sub section8 of Section 144C in passing its order dated 24.11.2015. Theassessee pleaded adjustment on account of the personnel cost andrisk adjustment. The objection raised by the assessee wasconsidered by the DRP and ruled in favour of the assesseeholding that the assessee is entitled for appropriateadjustment. This is evident from the finding in paragraphNo.3.3.4 of the order passed by the DRP dated 24.11.2015 whichis quoted hereunder for better appreciation.“3.3.4.........The contention of the assessee thatthere was gross underutilization of the assetsemployed due to lack of turnover, was also underconsideration before the DRP for AY 2009-10.However, the claim of the assessee was not allowedas no further detail regarding break-up of employeecost for itself as well as for the comparables atpage 97 of the Paper Book. Considering the issue inits entirety, this Panel is of the opinion thatappropriate adjustment should be allowed to theassessee. Hence, the TPO is directed to decide thepercentage of risk adjustment to be calculated inthis issue after taking into account all therelevant facts and details.”15. Thus, the order dated 24.11.2015 passed by the DRP isan order reducing the variation proposed in the draft assessmentorder dated 25.02.2015. Thus, in our considered view, theTribunal was not right in holding that the DRP exceeded itsjurisdiction in passing the order. In any event, the orderpassed by the DRP was not impugned before the Tribunal ratherwhat was impugned was the assessment order dated 28.12.2015passed under Section 144C(13) r/w Section 143(3) of the Act. Therefore, the Tribunal was required to consider on meritswhether the said assessment order was justified or not. 16. The learned counsel for the Revenue as well as theother senior standing counsel for the Revenue namelyMr.Swaminathan and Mr.Karthick Ranganathan submitted that theabove judgement rendered by us is likely to be misinterpretedwith regard to the powers of the DRP as circumscribed under subsection 8 of Section 144C. To be noted, that on facts, we heldthat the DRP has reduced the variation than what was granted tothe assessee in the draft assessment order. The Revenue wasclear in their mind in the challenge before the Tribunal whichwas an final order of assessment passed under Section 144C(13)and therefore, on facts we found that the DRP has granted reliefto the assessee and the correctness of relief granted to theassessee which has translated into a final assessment orderwhich was questioned by the Revenue before the Tribunal onmerits. Therefore, on facts we have held as above. 17. In the light of the above, we hold that the Tribunalshould decide the matter rather than allowing the appeal filedby the Revenue in its entirety. 17. In the light of the above, we hold that the Tribunalshould decide the matter rather than allowing the appeal filedby the Revenue in its entirety. 18. For the above reasons, this tax case appeal is allowedand the substantial questions of law are answered in favour ofthe assessee, consequently, the order passed by the Tribunal isset aside and the matter is remanded back to the Tribunal todecide the appeal filed by the Revenue on merits, on the groundsraised by it in the appeal memorandum as referred above and suchother grounds that may be adduced at the time of hearing. 19. With the above directions, this tax case appeal isallowed. No costs. mrm Sd/- Assistant Registrar(CS VI) //True Copy// To 1. The Income Tax Appellate Tribunal “D” Bench, Madras. “D” Bench, Madras. 2.The ACIT & Secretary, Dispute Resolution Parcel - 2, Bangalore. Dispute Resolution Parcel - 2, Bangalore. 3. The Deputy Commissioner of Income Tax, Corporate Circle - 1, Coimbatore. Corporate Circle - 1, Coimbatore. +1cc to Mr.S.Sridhar, Advocate, SR.No.47112+1cc to Mr.T.R.Senthil Kumar, Advocate, SR.No.46841 Tax Case No.118 of 2018 Kak(25/07/2019)